Strengthening Trade Capacity

The DAC Guidelines Strengthening Trade Capacity for Development DEVELOPMENT «INTERNATIONAL

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The DAC Guidelines Strengthening Trade Capacity for Development ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed: to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; and to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996), Korea (12th December 1996) and the Slovak Republic (14th December 2000). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention). Publié en français sous le titre : VIEILLISSEMENT ET TRANSPORTS Concilier mobilité et sécurité Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre français d exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, tel. (33-1) 44 07 47 70, fax (33-1) 46 34 67 19, for every country except the United States. In the United States permission should be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400, 222 Rosewood Drive, Danvers, MA 01923 USA, or CCC Online: www.copyright.com. All other applications for permission to reproduce or translate all or part of this book should be made to OECD Publications, 2, rue André-Pascal, 75775 Paris Cedex 16, France.

PREFACE 3 Preface The guidelines have been prepared by the DAC Secretariat in close collaboration with a range of stakeholders, including representatives of developing country governments and enterprise organisations. In addition, an informal steering group was set up at the start of the project and met several times to guide the work. It included representatives of multilateral organisations, including the World Trade Organisation (WTO), the United Nations Conference on Trade and Development (UNCTAD), the International Trade Centre (ITC), the United Nations Development Programme (UNDP) and the World Bank; independent research organisations, including the Overseas Development Institute, the European Centre for Development Policy Management, the International Centre for Trade and Sustainable Development and the Overseas Development Council; and bilateral aid agencies, including those of Canada, the European Commission (EC), Japan, the Netherlands, the United Kingdom and the United States. The report also draws extensively on four country case studies of trade capacity building efforts, commissioned for this project. They include El Salvador, Ghana, Senegal and Vietnam. A further case study was prepared on the African Enterprise Networks. These case studies are available on the OECD Online Bookshop along with a companion document, Building Trade Policy Capacity in Developing Countries and Transition Economies A Practical Guide to the Design of Trade Policy- Related Technical Co-operation. This guide, prepared by the UK Department for International Development (DFID), is aimed specifically at donor agency officials responsible for designing, implementing or improving trade capacity building programmes in the field.

TABLE OF CONTENTS 5 Table of Contents PREFACE 3 STATEMENT ON CAPACITY DEVELOPMENT FOR TRADE IN THE NEW GLOBAL CONTEXT 7 EXECUTIVE SUMMARY 13 1. INTRODUCTION 17 2. WHY DEVELOP THE CAPACITY FOR TRADE? 19 The New Global Economic Context 19 Addressing Capacity Gaps 21 How Trade and Trade Policy Can Reduce Poverty 25 Mainstreaming Trade into National Development Strategies 27 3. POLICY CONSTRAINTS TO TRADE 31 Gearing Up for Participation in International Trade 32 Promoting Competitiveness in the Enterprise Sector 35 4. FORMULATING A DURABLE POLICY FRAMEWORK FOR TRADE DEVELOPMENT 41 The Trade Policy Cycle 42 A Coherent Trade Strategy 44 Consultation Mechanisms 45 Policy Co-ordination 49 Trade Information 49 Trade Policy Networks 50 Trade Support Institutions 51 Private Sector Linkages 52 Outward-Oriented Regional Strategies 53 5. PRINCIPLES FOR DEVELOPING THE CAPACITY FOR TRADE 57 Co-ordinate trade capacity building efforts 57 Ensure that trade capacity building activities are comprehensive in scope and integrated in execution 58 Foster local ownership and participation in all trade-related development co-operation activities 59 Devise and embrace approaches that will strengthen sustainability 59 Strengthen donors own trade-related capacities 61 Commit greater financial and personnel resources to efforts to build trade policy frameworks in developing countries with the prospect of substantial returns 61

6 STRENGTHENING TRADE CAPACITY FOR DEVELOPMENT ANNEX 1 MONITORING AND EVALUATION 63 ANNEX 2 THE FOUR COUNTRY CASE STUDIES: PARALLELS AND CONTRASTS El Salvador, Ghana, Senegal and Vietnam 67 ANNEX 3 USEFUL WEBSITES ON CAPACITY BUILDING FOR TRADE DEVELOPMENT 69 BOXES 1 EU Food safety standards 21 2 Trade capacity building: concepts and evolution 23 3 The Integrated Framework for least developed countries 24 4 Trade and gender 26 5 UNCTAD/UNDP Programme on Globalisation, Liberalisation and Sustainable Human Development 28 6 Promoting competitiveness of Ugandan flowers 36 7 The Philippine approach 44 8 Lessons from Japan-Vietnam Joint Research (JVJR) 45 9 Examples of consultative mechanisms 46 10 Can an integrated approach work? 48 11 Development of a trade promotion network in Vietnam 52 12 Fostering export-oriented industrial clusters and networks 53 13 National institutional capacity for international negotiations: inter-ministerial co-ordination and public/private sector dialogue in Mauritius 54 14 The EU approach to donor co-ordination 58 15 The Role of ITC in capacity building for trade 59 16 EPZ: Incubator for trade development 60 17 Strategy performance indicators - the Philippines 64 FIGURES 1 Mainstreaming trade into national development strategies 29 2 National development strategy and the trade policy process 43 3 Joint Integrated Technical Assistance Programme 47 TABLE 1 Priorities in different types of countries 33

POLICY STATEMENT 7 TRADE AND DEVELOPMENT IN THE NEW GLOBAL CONTEXT: A PARTNERSHIP FOR BUILDING TRADE CAPACITY Statement by the DAC High Level Meeting upon endorsement of the DAC Guidelines on Capacity Development for Trade in the New Global Context Paris, 25-26 April 2001 Trade makes an essential contribution to development. Trade and trade liberalisation are not ends in themselves. When supported by appropriate policies, including, inter alia, macroeconomic stability, sound environmental practices and good governance, they make an essential contribution to pro-poor growth and sustainable development. They enhance a country s access to goods, services, technologies and knowledge. And by stimulating the entrepreneurial activities of the private sector, they create jobs, foster learning processes, attract private capital flows, increase foreign exchange earnings and generate resources for sustainable development and poverty reduction. A growing number of emerging market economies have already benefited greatly from globalisation. To join them in ways which are consistent with sustainable human development, less advanced developing countries need to take further the process of policy reform and institutional and infrastructure development, and be able to participate effectively in the processes that shape global economic rules, institutions and markets. Governments and private sectors of many countries still lack the institutional and human resource capacities to deal with the complexity of the multilateral trading system and the multiple demands of regional, bilateral and multilateral trade agreements. OECD countries have a major stake in strengthening the traderelated capacities of these countries. It is in their mutual interest to help developing countries overcome trade capacity gaps, negotiate effectively and credibly, implement trade agreements and meet their obligations under them. If these challenges are not met, many developing countries may lose faith in the benefits of openness, have less capacity to sustain imports and remain dependent on foreign aid.

8 STRENGTHENING TRADE CAPACITY FOR DEVELOPMENT To promote developing countries integration into the world trading system, we agree to: Work with partner countries to help them build trade capacities, enhance their trade performance and participate effectively in the rulemaking and institutional mechanisms that shape the global economy. Trade capacity building complements vital domestic reform efforts and action by industrial countries to open their markets to developing country goods and services. Support partner countries efforts to mainstream trade as part of their national development and poverty reduction strategies. In this context we recognise the links between trade capacity building activities and mainstreaming trade as part of the poverty reduction strategy processes. We will work closely with the World Bank and IMF as well as other associated agencies towards this objective. Assist developing countries to establish effective and sustainable trade policy frameworks and processes. Local ownership and participation are defining features of such a process. We will help to facilitate the consultations among stakeholders, with the private sector and civil society, within governments and across regions that will ensure that development co-operation activities are locally-owned and demand-driven. Place the private sector at the centre of efforts to build a trade policy process. All trade capacity constraints need to be viewed through the eyes of the private sector actors. Development co-operation can also help to strengthen private sector associations to voice their aspirations and constraints and make an active contribution to the trade policy-making process. Foster commitment among country level aid managers for trade development and provide them with sufficient institutional support in terms of resources, incentives and knowledge of trade issues to undertake trade capacity building activities. A regular dialogue between the aid and trade communities can facilitate this process. Help strengthen partner countries ability to assume a leadership role in their development process and to sustain that process. We should reach out as much as possible to local experts, institutions and consultants to help partner countries make better use of existing capacities and to build new and sustainable capacities. This requires a long-term commitment, but will be more effective than an ad hoc approach that fails to create self-sustaining trade policy processes.

POLICY STATEMENT 9 Ensure that trade capacity building activities are comprehensive in scope and integrated in execution. Building viable trade policy frameworks will require action in multiple areas, involving multiple stakeholders. Comprehensive approaches will ensure that initiatives in one area do not fail because of a lack of complementary action elsewhere. The Joint Integrated Technical Assistance Programme (JITAP), involving a coalition of bilateral and multilateral donors and eight developing countries, helps to show us how this can be done. Ensure, in collaboration with the core agencies of the Integrated Framework for Trade Related Technical Assistance, that trade capacity building activities are implemented and co-ordinated effectively in accordance with partnership principles. This will mean working more proactively with these agencies. It will also mean expanding financial resources allocated to trade-related activities, either through the Integrated Framework Trust Fund or bilateral and other multilateral activities. We recognise that bilateral agencies can and should have a more prominent role in co-ordinating donor responses in those countries where they have a strong field presence and interest in trade capacity building. Work actively with the trade community to help integrate development perspectives into trade policy formulation and implementation. Efforts to strengthen processes such as the Trade Policy Review Mechanism of the WTO and the Investment Policy Review of UNCTAD might be supported in this regard. They are potentially useful mechanisms to raise awareness of constraints to trade and investment in developing countries. They can help to ensure coherence between trade policies and regulatory regimes on the one hand, and overall development goals on the other. The DAC Guidelines on Poverty Reduction also provide useful guidance on mainstreaming development generally and promoting policy coherence. Improve information-sharing and co-ordination among bilateral and multilateral donors in this area. The challenges of trade capacity in any given country are beyond the means of any single donor. Better co-ordination and a sharper division of labour will help prevent duplication, make best use of resources and avoid overloading partner country capacities. The poverty reduction strategy processes and the Integrated Framework are important instruments for enhancing co-ordination. Ensure that our bilateral activities support partner countries outward-oriented regional co-operation strategies. Regional strategies can help lower transaction costs and provide export production and marketing experience in familiar regional markets before entry into more competitive international ones. Such strategies should be consistent with broader multilateral trade and development initiatives.

11 At the Ministerial Meeting in Marrakesh establishing the WTO, Ministers recognised that the globalisation of the world economy has led to ever-growing interactions between the economic policies pursued by individual countries, including interactions between the structural, macroeconomic, trade, financial and development aspects of economic policy-making. The task of achieving harmony between these policies falls primarily on governments at the national level, but their coherence internationally is an important and valuable element in increasing the effectiveness of these policies at national level. [Declaration on the contribution of the WTO to achieving greater coherence in global economic policy-making.] At the Second WTO Ministerial Conference in Singapore, Ministers further committed themselves to address the problem of marginalisation and continue to work for greater coherence in international economic policy-making and for improved co-ordination between the WTO and other agencies in providing technical assistance [WT/MIN(96)/DEC Ministerial Conference, Singapore Singapore Ministerial Declaration Adopted on 13 December 1996]. At the G-8 Summit Communiqué in Okinawa, Ministers noted that Trade and investment are critical to promoting sustainable economic growth and reducing poverty. We commit ourselves to put a higher priority on trade-related capacity building activities. At the meeting of African Trade Ministers in Libreville in November 2000, Ministers reaffirmed Africa s commitment to working in the framework of the Multilateral Trading System within the WTO. Ministers also emphasized the need to make trade a priority in the national development policies of African countries.

EXECUTIVE SUMMARY 13 Executive Summary The trade, aid and finance communities are developing more coherent strategies to help developing countries integrate with the global economy. These guidelines provide a common reference point for these efforts. They also show how donors can help developing countries build their capacity for trade. Trade capacity building enhances the ability of partner country policy-makers, enterprises and civil society actors to: Collaborate in formulating and implementing a trade development strategy that is embedded in a broader national development strategy. Strengthen trade policy and institutions as the basis for reforming import regimes, increasing the volume and value-added of exports, diversifying export products and markets and increasing foreign investment to generate jobs and exports. Participate in and benefit from the institutions, negotiations and processes that shape national trade policy and the rules and practices of international commerce. Five premises One: Trade and its liberalisation can contribute to development. Trade and trade liberalisation are not ends in themselves. Nor are they sufficient to generate dynamic and sustainable development on their own. But they can enhance a country s access to a wider range of goods, services, technologies and knowledge. And by stimulating the entrepreneurial activities of the private sector, they can create jobs, foster vital learning processes, attract private capital flows, increase foreign exchange earnings and generate resources for sustainable development and the alleviation of poverty. Two: Developing countries want to integrate with the global economy. Beneficial integration with the global economy requires a major and comprehensive effort at further reforms and more effective participation in the rule-making and institutional mechanisms that shape the global economy. Ensuring that this integration is consistent with sustainable human development is a key challenge for partner countries and for donors. Three: The new global economic context offers promising opportunities but poses daunting challenges. The increasing complexity of global markets, the new challenges of the multilateral trading system and the competing demands of regional, bilateral and multilateral trade agreements confront developing countries with an expanding array of competitiveness and policy challenges. Yet, they frequently lack the institutional and human resource capacity to meet these challenges. Four: Trade policy-makers have a major stake in strengthening the trade-related capacities of developing countries. It is in the interest of OECD countries that developing countries overcome trade capacity gaps, negotiate effectively, implement trade agreements and meet continuing obligations under those agreements. Trade-related capacity building offers a valuable tool for meeting the challenge to the MTS posed by the ongoing concerns and disputes over trade and labour and trade and the environment.

14 STRENGTHENING TRADE CAPACITY FOR DEVELOPMENT Five: Donor support can strengthen the multilateral trading system by addressing the trade challenges facing developing countries. Governments have pledged in recent months to strengthen the Integrated Framework, and heads of state at the last two G-8 Summits called for enhanced capacity building for trade and improvements in its delivery. Putting in place an effective policy framework for trade One of the main objectives of trade capacity building is to help developing countries put in place sustainable trade policy frameworks and processes. Indeed, the record suggests that no country has achieved substantial gains in trade without an effective trade policy framework. Any such framework will be constructed, of course, from discrete institutions and arrangements, each needing attention from developing countries and donors. But all efforts should be guided by a vision to mainstream a comprehensive trade development strategy in a broader national development and poverty reduction strategy. A sound trade policy framework and process will: help developing countries address a wide range of trade-related challenges and opportunities over an extended period; facilitate genuine local ownership of trade development efforts; reduce the risk that the trade policy priorities of donors will influence developing country trade policies; and enable developing countries to sustain and upgrade trade-related capacities after donors have departed. Elements of an effective trade policy process Although it is not possible to recommend a single policy framework that is ideally suited to promoting trade, recent capacity-building efforts point to several features or arrangements that have tended to promote success. Donors and developing countries should seek to construct trade policy frameworks with the following elements: A coherent trade strategy that is closely integrated with a country s overall development strategy. Effective mechanisms for consultation among three key sets of stakeholders: government, the enterprise sector, and civil society. Effective mechanisms for intra-governmental policy co-ordination. A strategy for the enhanced collection, dissemination, and analysis of trade-related information. Trade policy networks, supported by indigenous research institutions. Networks of trade support institutions. Private sector linkages. A commitment by all key trade stakeholders to outward-oriented regional and global strategies.

What this means for donors Co-ordinate trade capacity building efforts much more closely. The institutionbuilding to leave behind a sustainable trade policy framework is beyond the means of any single multilateral or bilateral donor. Such a policy framework cannot operate effectively if the institutions and arrangements constituting it are assembled (or strengthened) independently. The complexity of this development co-operation agenda demands a significant measure of donor agreement on the objectives, a sequencing of activities and a division of labour. And by co-financing a trade policy framework, donors will also conserve funds, share risks and leverage their investments. Ensure that trade capacity building activities are comprehensive in scope and integrated in execution. Assembling viable trade policy frameworks will require action in many areas by many stakeholders, and efforts in one area must be implemented jointly with efforts in others. That will help partner countries to assess priority needs and donors to identify and co-ordinate priority interventions. Foster local ownership and participation in all trade-related development co-operation activities. Local participation and consultation among stakeholders, within governments, across regions define an effective trade policy process. By helping developing countries build such a process, donors will take a major step toward ensuring that development co-operation initiatives are locally-owned and driven by demand. An effective trade policy process will also minimise the long-term risk that the trade or commercial interests of donors will conflict with those of their partner countries. Embrace approaches that strengthen the ability of partner countries to continue helping themselves once donors have left. When the focus of development co-operation is on the construction of a trade policy framework, the necessity that donors find ways to build sustainable capacities becomes self-evident. One-off initiatives in which foreign technical experts spend weeks or even months in a country but leave little expertise behind should be avoided. And in staffing projects, donors should rely on local talent as much as possible. Strengthen donors own trade-related capacities. Donors need to enhance their range of skills and knowledge. Expertise in building institutions (public, private and hybrid) and consultative mechanisms will be especially important. So will that for nurturing policy and support networks. In addition, strengthening stakeholder consultation and policy co-ordination will require better facilitation skills, especially in the field and greater understanding of multilateral and regional trade issues. Donors would also benefit from more systematic exchanges of information on each other s programmes and experiences, perhaps using a dedicated Internet Website. Commit significant financial and personnel resources to build trade policy frameworks in developing countries with the prospect of substantial returns. Helping to build a trade policy framework in a country where none has existed before will require long-term donor commitments and sustained effort by many talented officials. The long-term cost effectiveness of such an effort will be much higher than that of an ad hoc approach that fails to create self-sustaining trade policy processes. But as enduring capacities are built, donors can gradually recede. EXECUTIVE SUMMARY 15

INTRODUCTION 17 1 Introduction These guidelines provide overall policy guidance and a common reference point for the trade, aid, and finance communities on capacity development for trade, putting trade capacity building in the context of comprehensive approaches to development and poverty reduction. They also review and analyse the strategic importance of trade capacity development. And they identify key principles and processes that shape the design and delivery of trade capacity building activities. Any dynamic process of economic growth and integration in the world economy starts with appropriate policies at home social, economic and political policies that can allow trade to contribute to development. Trade is not an end in itself. Nor is it sufficient on its own to generate dynamic and sustainable development. But trade can enhance a country s access to a wider range of goods, services, technologies and knowledge. It stimulates the entrepreneurial activities of the private sector. It creates jobs. It fosters vital learning processes. It attracts private capital. It increases foreign exchange earnings. Above all, it generates the resources for sustainable development and the alleviation of poverty. Without the gains from trade, developing countries have less ability to sustain imports, less faith in the benefits of openness and continued dependence on foreign aid. That can undermine the capacity of governments to develop the economic and social infrastructure for a sustained reduction in poverty. It can also lead to a vicious circle of political instability, environmental degradation and detachment from regional and global initiatives. So, it is clearly in the interest of all countries to help developing countries enhance their capacities to capture and exploit the benefits of trade for sustainable development. The multilateral trading system (MTS) and international markets have become highly complex. And far more than stroke of a pen efforts to cut tariffs, the new elements of the MTS require major investments in institutional and human capacity and a multidimensional strategy for integrating into the global economy. Developing countries need to frame a broad set of trade initiatives within an appropriate macroeconomic environment and a comprehensive approach to development. They also need to be active in exercising their rights and obligations in the multilateral trading system. But they cannot achieve these objectives without substantial support from the international community. Many OECD countries are committed in their assistance programmes to helping developing countries integrate themselves more fully into the world economy. This commitment reflects the widely held view that expanded trade and investment can be critical engines of growth and that development co-operation can spur the private sector development on which trade and investment depend. Many donors, of course, have devoted substantial resources to private sector development initiatives over the past few decades, some helping also to generate exports and investment. But the marginalisation of the LDCs, the growing complexity of the multilateral trade system, and the competing demands of regional and bilateral trade initiatives suggest that more is needed. The equitable integration of developing countries into the global economy may require new forms of trade-related development co-operation. start with appropriate policies at home social, economic and political policies

18 STRENGTHENING TRADE CAPACITY FOR DEVELOPMENT Development co-operation must take a holistic approach Experience has demonstrated that to be effective in this area, development co-operation must take a holistic approach which links macroeconomic and structural reforms which foster strong private sector growth, with human and institutional capacity development in a targeted, coherent and comprehensive manner. Individual measures to create the right policy framework or to build productive capacities or enhance developing country participation in trade fairs are not in themselves sufficient if taken in isolation. Moreover, the government, the private sector, and civil society each have a role to play both in improving trade performance and strengthening participation in trade policymaking. Translating these principles into action has, however, proven to be much more difficult than anticipated. Trade-related capacity building involves a range of interconnected activities of donors and partner countries to enhance the ability of the partner country s policymakers, enterprises and civil society actors in three areas. First is collaborating on the development and implementation of a trade development strategy that is embedded in a broader national development strategy. Second is strengthening policies and institutions as the basis for increasing the volume and value-added of export production, diversifying export products and markets, reforming import regimes and increasing export- and employment-generating foreign investment. Third is participating in and benefiting from the institutions, negotiations and processes that shape national trade policy and the rules and practices of international commerce. Bilateral donors can add significant value to the implementation of integrated approaches. They have the benefit of decades of experience in project implementation and evaluation, a strong field presence and well-established dialogues with the private sector and civil society in many partner countries. Suggestions for ways to improve partnership approaches to capacity development for trade will be a key part of these guidelines. The guidelines are organised as follows: Section 2 sets out the rationale and strategic importance of trade capacity building in light of the new global economic context. It explains what trade capacity building is and situates it in the context of comprehensive approaches to development and poverty reduction. Section 3 identifies the key competitiveness and policy challenges faced by developing countries in their efforts to improve trade performance. Section 4 seeks to identify the elements necessary for putting in place an effective framework for trade policy processes. Finally, Section 5 considers the principles and approaches to help ensure effective development co-operation in this area.

WHY DEVELOP THE CAPACITY FOR TRADE? 19 2 Why Develop the Capacity for Trade? The impressive record of the developing world as a whole in the past couple of decades obscures a wide diversity between the more and less advanced developing countries in trade performance and participation in the WTO, regional institutions and global economic policy discussions. Despite major efforts at reform, many of the poorest countries, especially in Sub-Saharan Africa, have not yet been able to integrate successfully into global markets, and hence to participate in the growth-inducing and poverty-reducing benefits of trade. The reversal of this trend towards marginalisation and helping the less advanced developing countries reap full benefits from the multilateral trading system have become important policy objectives for both developing countries and the wider global community. Developing countries want to join in the globalisation process. They want to enhance the conditions for faster investment and economic growth, expanding and diversifying their exports and ultimately reducing poverty. They know that integration in the global economy requires a major effort at further reforms and more effective participation in the rule-making and institutional mechanisms that shape the global economy. But their governments confront an expanding array of policy challenges, frequently with limited institutional and human capacity. And their firms face the challenges of competition. The New Global Economic Context The globalising world is characterised by an increasingly complex and elaborate web of linkages in markets for goods, services, investment and finance in which developing countries are assuming a more important role. A rapidly expanding group of developing countries have taken deliberate steps to open their economies wider to the outside world through a combination of unilateral, regional and multilateral liberalisation initiatives. This has led to an increase in their trade to GDP ratios and greater stakes in a well-functioning world economy. Globalisation has been driven partly by technological innovations that have shortened economic time and space. This implies new possibilities for upgrading all economic activities, not just the high technology sectors. Information and communication technology are lowering transaction costs for a very broad range of actors and allowing for world-wide sourcing strategies, which offer new scope for developing country firms to participate in global markets. Moreover, along with regulatory innovations, new technologies have made it possible to supply many services on a competitive basis and have opened up possibilities for developing countries to trade in such services. 1 Developing countries have to adjust to a growing volume of trade through ongoing commercial relationships and to the competitive strategies of multinational corporations in different countries through buyer-supplier arrangements, subsidiary-headquarters relationships, corporate alliances and production and marketing deals. Managing these relationships often initiated by purchasers and frequently involving investment ties can be more difficult than navigating the traditional export-import marketplace. And recent growth in the share of non-traditional products in developing countries output also requires new markets and marketing strategies. Many of the poorest countries have not yet been able to integrate They frequently lack institutional and human capacity Increasingly complex and elaborate web of linkages in markets Developing countries have to adjust...

20 STRENGTHENING TRADE CAPACITY FOR DEVELOPMENT Participation in the multilateral trading system Implementing the new WTO agreements Rules and institutional mechanisms that shape the global economy Networking can strengthen the capacity of developing countries to adjust to changes in international tastes, prices and competitive conditions. Regional networks can reduce the enormous co-ordination costs in global sourcing and marketing. They can also help firms overcome production bottlenecks and build technological and managerial capacities. 2 Many less advanced developing countries are finding that some of their most promising new trade opportunities are in markets outside the OECD. Regional networks can help them trade on a commercial (rather than preferential) basis and adjust to the stiff competition as they move up the value chain into new markets. Globalisation blurs the national identity of firms and of products and undermines the traditional separation between domestic and international policy-making. It thus reduces the scope for autonomous national policies, with the policy parameters now set by the rules of the game for global markets. This can be good-reducing the latitude to pursuing inappropriate policies, such as overvalued exchange rates, without inflicting serious damage on their economies. 3 But it also demands that they come to terms with international trade rules, agreements, institutions and developments. Formal participation in the multilateral trading system through the WTO offers many advantages to developing countries, which are joining at a rapid pace. They recognise that trade rules and multilaterally negotiated agreements can affect their access to markets, help them withstand domestic pressures opposed to policy reform and improve the credibility of their domestic reform process. 4 Membership in the WTO thus can enhance the environment for greater investment and faster trade and economic expansion. It also gives them the protection of a rules-based system that guarantees access to a binding dispute settlement system and more generally strengthens the foundation for global political stability. But the attempts of less advanced developing countries to adapt to this broader trade agenda have exposed gaps in trade-related capacity. They face three main challenges. First, implementing the new WTO agreements and obligations demands much from the institutional and human capacities of poor countries. The Uruguay Round addressed regulatory policies and business practices that can restrict trade behind borders, and developing countries took on unprecedented obligations to reform trade procedures and much domestic regulation. These obligations covered such issues as import licensing procedures, customs valuation, intellectual property law and technical, sanitary and phyto-sanitary standards. But do poor countries have the institutional capacity for these reforms? Can they finance the necessary investments in the light of other development priorities? 5 And can compliance bring benefits if it is not part of broader trade policy reforms? Ensuring that trade reform is comprehensive, coherent and sustainable a major task for poor countries thus becomes even more important. 6 Second, considerable capacity is needed for effective participation in the design, enforcement and use of the rules and institutional mechanisms that shape the global economy. Being latecomers to full participation in the trading system and negotiating rounds, the less advanced developing countries had great difficulty participating effectively in the Uruguay Round negotiations. They lacked the capacity for effective participation in the negotiation process, and they had limited impact on the design of the new rules. As the WTO process becomes even more complex and technical, it is essential that developing countries develop the capacity to articulate their interests and defend their rights in the WTO framework. 7

WHY DEVELOP THE CAPACITY FOR TRADE? 21 Box 1. EU food safety standards A new study by World Bank researchers (Otsuki, Wilson and Sewadeh) investigates what health standards mean for trade. Reported in the Financial Times on 26 October 2000, the study examines the effects of a European regulation limiting the amount of aflatoxins in imported food. (Aflatoxins are a fungus-like substance linked to liver cancer.) The EU regulation insists on a tighter standard than that recommended by CODEX, which sets international food standards, or by the WHO and the US Food and Drug Administration. The European approach to food safety is based on the precautionary principle, which justifies restrictions or regulations on food imports even while the scientific risks to health remain unproven. The study calculates that the EU standard, compared with the CODEX, would save two lives for every billion. It would also reduce exports to Europe of cereal, dried fruit and nuts from nine African countries by 64 per cent, or $700 million. And the EU s sampling method would further reduce African exports. It is important, however, to consider such specific measures in the context of broader policies. The EU has taken major initiatives recently to improve market access for developing countries, including the Cotonou Agreement with the ACP countries (Box 14) and the Everything but Arms initiative, which applies to all Least Developed Countries. Nearly all of the WTO s developing country members are also involved in demanding regional and bilateral trade negotiations and in implementing the agreements reached. Those countries may face new competitive pressures as well as complaints of unfair competition, dumping, etc. from local businesses. Separating legitimate trade issues from normal competitive pressures may severely tax their limited capacity for analysis. 8 They will also have difficulty in balancing competing trade priorities. Third, gaining access to export markets of interest will be a major challenge for developing countries. While external constraints may not be the primary reason for slow export growth from poor countries, market access must be seen as an integral part of the capacity building agenda. Barriers to agriculture may, for example, impede the export of agricultural and labour-intensive products, hampering efforts to diversify into downstream processing and into higher value-added and faster growing products. In other words, trade barriers repress the development of trade capacity. Product standards and other import requirements in industrial countries such as environmental, labour and health standards can also pose a significant challenge to developing country export capacity. While product standards have an important role in the effective functioning of markets and trade, developing countries often lack information on such requirements and the technical and financial resources to comply. They also have limited capacity to participate in the design and implementation of product standards, to set up certification and accreditation facilities, and to bring disputes when standards discriminate against their exports. Gaining access to export markets Addressing Capacity Gaps The attempts of the less advanced developing countries to adapt to the new trade agenda have exposed trade-related capacity gaps that are no longer just trade policy challenges they are development challenges. Requests from developing countries for support to strengthen their basic capacities in trade are on the rise, and there is a general consensus to provide that support. But there is still confusion about what building trade capacity means. Getting clarity on this would promote a more productive sharing of information on projects and strategies. It would also permit developing countries to perform needs assessments These are development challenges

22 STRENGTHENING TRADE CAPACITY FOR DEVELOPMENT using a common standard, facilitating cross-national comparisons and donor co-ordination. And it would help ensure the complementarity of regional and multilateral activities, strengthening performance monitoring and evaluation across projects and countries. According to the DAC s 1997 survey of trade development activities, Many DAC Members found it difficult to isolate direct trade development activities from countrylevel programmes which have an indirect impact on trade. 9 Indeed, many donors today do not maintain a formal separation in their programmes between trade capacity building and other activities. Canada, for example, has treated its trade capacity development as a component of its private sector development strategy but its trade policyrelated assistance as part of its strategy to develop institutional capacity for good governance. The EU recently dropped the distinction between trade capacity building, or trade promotion, and private sector development, merging the two departments into one. But trade policy issues are still handled by a separate department. Two decades of experience with a variety of approaches (Box 2) have culminated in an ambitious concept of how best to help developing countries enhance their trade. This new concept has several key elements, loosely organised into the what and the how of trade capacity development. On the what, perhaps the most important requirement is to address trade-related constraints known to have some bearing on trade and investment. The trade policy environment. Policy-making capacities relevant to national, regional and multilateral trade. Export-related capacities and infrastructure. Trade facilitation and support services. Market access. A related requirement is to increase the capacity needs of individuals and institutions essential for effective trade policy. A key here is to support networks of individuals and institutions to allow for maximum pooling of resources and to set in motion sustainable capacity building at the local and regional level. The main actors include: Government policy-makers and ministries. Business people. Private sector associations. Trade support institutions. Labour unions, NGOs and other civil society groups, including women s groups. Independent or university-based research entities. The secretariats of regional trade organisations. On the how, it is clear that strengthening of human and institutional capacities will have to be comprehensive not only because of the breadth of the challenges, but because of their interdependence. It has also become clear that trade development must be mainstreamed in development co-operation, just as gender and environmental considerations have been. This means that trade development strategies must be embedded in comprehensive development strategies, for it is not possible to respond to trade-related capacity constraints without also addressing the even more fundamental constraints and problems. Consider the weak professional training for policymakers. The weak educational and vocational training systems. Governance problems. The absence of an entrepreneurial tradition. The excessive government intervention in economic decision-making. All at the root of trade-related constraints.

WHY DEVELOP THE CAPACITY FOR TRADE? 23 Box 2. Trade capacity building: concepts and evolution For many years, promoting the development of trade was thought to require a set of limited interventions by donors and partner countries, and donor involvement in trade development was correspondingly narrow. Export marketing (1970s). Donors supported developing country trade promotion organisations, generally to help exporters find buyers for their products. These organisations proved inadequate as a trade development mechanism because they continued to concentrate on offshore market development and promotional activities, rather than on addressing the fundamental constraint to improved export performance the inability to develop international export capacities that are consistent with the requirements of the market. 10 The International Trade Centre in Geneva is now trying to redefine trade promotion, working with the trade promotion organisations to ensure that experience translates into new approaches. Trade liberalisation (1980s and early 1990s). With trade liberalisation as part of structural adjustment programmes designed by the key international financial institutions, some countries posted substantial gains in trade and investment, but others did not. As loan conditionalities eased in the 1990s, many liberalisation efforts slowed. Trade facilitation. Reducing trade-related transaction costs and building familiarity with the rules, procedures and institutions of the international trade system are the focus of such international agencies as the WTO, UNCTAD, UNDP and the International Trade Centre. Trade capacity development. The new approach focuses on building capacity by facilitating a country-driven participatory trade policy process as part of a comprehensive approach to overall development goals and poverty reduction strategies. The Integrated Framework is relevant here for at least four reasons (Box 3). It recognises the need: To look beyond traditional trade policy instruments for integrating the poorest countries in the system. Several poor countries still face a wide range of constraints that prevent them from making the best use of opportunities. To address trade development capacity gaps comprehensively, based on a country s specific needs and priorities. To provide co-ordinated and integrated responses by the donor community as an effective way to address the enormous challenges and the limited resources. To mainstream trade into comprehensive development frameworks and poverty reduction strategies. Capacity development for trade is of mutual interest for developed and developing countries Strengthening trade-related capacities is ultimately a challenge for development policy and practitioners, but trade policymakers have a major stake in its success. It is in the interest of OECD countries that developing countries are able to overcome their capacity gaps, implement trade agreements effectively and meet their continuing obligations under those agreements. It is also in their interest that developing countries be strong negotiators. A country that knows its own trade interests and can confidently articulate them is a more reliable negotiating partner. It is more likely to conclude agreements that will serve its own interests, be politically sustainable back home and therefore be implemented effectively. Trade policymakers have a major stake in its success